Governing Digitally: Amazon’s Summer Blockbuster

In late July, Amazon startled investors with the tiniest of profit. The next day, its market capitalization surpassed that of Walmart.

Despite strong growth year after year, Wall Street had grumpily grown accustomed to bottom-line losses, most recently anticipating a second quarterly shortfall of 14 cents per share. Instead, Amazon revealed gains of 19 per share, though as one CNBC analyst quipped, they could have reported just about any number they wanted…

How ironic, then, that the company known for digitizing commerce and displacing bookstores has seemingly learned how to print money. In doing so, there are two predominant drivers of Amazon’s steady rise and both are consequential for the public sector: retail and cloud services.

The better known retail juggernaut is most well-known and by far the largest online commerce platform in Canada and the world. The recent demise of Future Shop is a derivative of this trend (much as Best Buy’s revival stems in large part from its own online prowess) and like Costco, Amazon has found a way to entice customers pay for the privilege of using its platform (albeit with various incentives provided by its Prime upgrade).

Yet in some ways, Amazon is but a phantom circumventing Canadian borders. As TheGlobe and Mail reported in January, businesses with no physical presence in Canada are deemed not to be “carrying on business” in the country, and aren’t required to collect sales tax when they sell digital supplies to Canadians. This is a problem, as it creates a five-to-15-percent price gap compared with offerings from domestic retailers.

As the article notes, Amazon is not alone in this regard; the popular internet TV platform Netflix provides another prominent example. In the 2014 federal budget, the government announced plans to consult on its taxation rules, sparking lobbying by all sides ever since. In the US, Hillary Clinton has already taken notice, committing to allow state and local governments to experiment with new taxation regimes targeting online commerce.

Looking ahead, such debates will only intensify, and new regulatory challenges are clearly on the horizon, such as the use of delivery drones, among others. On such issues, Amazon’s stance toward government is more traditional, seeking to exert influence and shape policy. In doing so, a key variable for both parties is the cleavage between Amazon’s global market reach and the accompanying patchwork of political jurisdictions.

Yet it may well be Amazon’s web services (AWS) division that eventually proves more impactful on government, as software and infrastructure gravitate to the cloud. Nonetheless, the company is a widely regarded as the industry leader and its recent decision to begin reporting separate results for cloud services marks an important inflection point.

Already, the Government of Ontario has signed on as has, on a much larger scale, the CIA. South of the border, Amazon has built a reported $600 million private cloud for the spy agency. While cost was a key issue (leveraging the cloud-based utility model, the CIA will pay only for the computing power it uses), performance was the real driver. One former intelligence official is quoted in an article in The Atlantic (July, 2014) stating: “We decided we needed to buy innovation.”

The CIA’s Chief Information Officer has publicly remarked that, “AWS’s capacity to bring commercial innovation from places like Silicon Valley … is one of the contract’s greatest benefits.” In fact, despite its presence in the Valley, Amazon is based further north in Seattle, home to Starbuck’s, another stellar summer performer. Have your coffee in the cloud? One out of every five American Starbucks customers pays for their beverage through a mobile device.

As with other technology giants past and present, Amazon will challenge government to both collaborate and regulate in new ways. Not unlike Uber, the company has faced controversies surrounding its treatment of employees and questions have been raised about its growing carbon footprint and the energy sources fueling its massive data centres. Yet the relentless march of Amazon us unlikely to abate anytime soon.

Jeffrey Roy is professor in the School of Public Administration at Dalhousie University (roy@dal.ca).